Inflation 101

For example, take a look at your fuel bill: The CPI may indicate that there is a 1% jump in the price of gas, but that doesn’t really mean anything to you until you check your own numbers. If you’re paying 5% more for gas than you were a few months ago, you’re suffering at what is likely the higher end of the gas inflation scale. But gas is just one example. One way to be certain that you’re keeping your expenses in line is to check your totals against the national averages. You won’t be able to stop your costs from rising, but if you can keep your costs from growing faster than the rest of the country’s, you’ll be ahead of the game.

what causes inflation?

Virtually every major economist has a theory about what causes inflation, from increasing demand for goods, which pulls prices up, to decreasing supply, which causes scarcity and also drives prices up. The truth is that all the theories are right in some ways and wrong in others. But none of that matters much when you’re the guy caught in the throes of inflation. For the individual, inflationary spikes — no matter what the cause — mean only one thing: trouble.

You’ll see prices jump on everything from food to gas, but don’t expect help from your boss. His costs will go up too, which means your wages will likely stay the same. But there is something you can do: Get a new savings account. Interest rates typically rise with inflation — though not as much. The trouble is that few banks do you the favor of offering you the higher yield. If you open a new savings account, however, you’ll get the most recent rate. Likewise, if you have money to invest, an inflationary period is a good time for bonds.

what is deflation?

Deflation is the exact opposite of inflation. In other words, it’s a drop in prices. While it may sound great, it’s not the best news because it typically means that the value of everything you own could fall. So what should you do when there’s deflation? For starters, it’s probably not the time to get a new job because you’ll likely have to take a pay cut — it’s one of those times where you need to focus on staying where you are and justifying your salary. Assuming you can do that, the next thing you should do is take advantage of the drop in prices. If you can afford it, this is the time to buy a home because you’re timing the market. Not only will you get a good deal on the price of the house, but you should also be able to lock in a low mortgage rate.

beating inflation

The simple truth is that no matter how hard you try, you’ll never avoid the adverse effects of inflation. But that doesn’t mean you should give up. In fact, it means that you should work as hard as you can to educate yourself on the matter. Why? Well, with billions of dollars on the line, major investment banks employ armies of economists just to track inflation. Of course, those companies can afford to lose a few million if the economy turns south. But for you, an economic downturn could be catastrophic. Knowing what inflation is, how it works and how you can limit its effects could help you keep your finances safe if the economy tanks.